China's top telecoms equipment makers Huawei and ZTE denied receiving illegal government subsidies that helped them undercut rivals in recent years, after media reported the European Union planned to take action over unfair trade practices. Action by the EU could spark a trade war, analysts warned.

Cheap prices have allowed Huawei (Shenzhen, P.R.C.) and ZTE Corp (Shenzhen, P.R.C.) to grab a big share of the global network equipment market in recent years, pushing firms such as Nokia Siemens Networks (Espoo, Finland) and Alcatel Lucent (Paris) to the brink of extinction.

The Financial Times quoted unidentified EU officials and executives as saying the Commission had been gathering evidence to show Huawei and ZTE had used subsidies to allow them to sell goods below cost in the EU. A spokesman for EU trade chief Karel De Gucht said he could not confirm the contents of the FT report.

Both companies said on Tuesday they had not been contacted by the EU. "We deny claims made in the media that Huawei employs dumping practices and has benefited from illegal state subsidies," Huawei said in an emailed statement.

ZTE said it "receives no illegal or hidden subsidies, nor does it dump products in any markets where it operates".

EU trade ministers are scheduled to meet in Brussels on Thursday, an EU diplomat said.

"We think that though the ministers will have an informal debate over lunch on China, and they might touch on this topic, there will be no formal decision," says the EU diplomat. "It's sensitive because there are some European firms in the Chinese market that might face consequences."

A European Commission report in 2011 said China's largest telecom equipment makers benefit from significant government support, including "massive" credit lines from state-owned banks. However, European telecoms firms rely on smaller-scale export credits from government-backed bodies, emphasizing the blurred lines marking what is allowed under international rules and what is not.

China is the European Union's second-biggest trading partner after the United States, and the bloc is China's biggest trade partner. Trade between the two is forecast to hit a record $397 billion this year.

Despite this, relations have been tense; with the EU's De Gucht complaining China subsidizes "nearly everything", distorting competition. However, action by the EU over telecoms equipment could be counterproductive.

"I don't think it'll be a very good move by the EU to launch an anti-dumping case," says Yang Haofan, an analyst at Guotai Junan Securities in Shanghai. "If that happens, European vendors such as Ericsson and Alcatel-Lucent will have problems trying to sell equipment in China, which is a bright spot of global telecom spending now."

Inge Heydorn, a fund manager at Sentat Asset Management in Sweden, also said China would likely hit back at European firms.

Ericsson, the world's biggest seller of mobile equipment, said it did not support any EU move and had not prompted it to act.

"The EU faces the risk of initiating a negative spiral by targeting individual firms," Ulf Pehrsson, head of government and industry relations at Ericsson, said in an emailed comment. "Ericsson is a strong supporter of free trade and we don't believe in this type of unilateral measure."

In the first quarter, Ericsson's sales to China and north-east Asia were roughly equivalent to its revenue from the EU, at $1.29 billion. Nokia Siemens Networks and Alcatel-Lucent declined to comment.

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